Beware Shifting Northern Winds: Strategist

So many investors are long the Canadian dollar that a little shift in their mood could mean a big hit.

Things have been looking good up in the great white north - so good, in fact, that investors now have big long positions on the Canadian dollar.

How big?

"The CAD net long position reached a new record of $10.5bn" last Thursday, says Camilla Sutton, chief currency strategist at Scotiabank. "This is a significant week-over-week build and breaks the October 2007 $8.2bn record."

It's logical for investors to be high on the loonie, what with the price of oil, a key Canadian export, having been on the rise and a central bank disinclined to intervene to curb the currency's strength. Sutton herself expects the Canadian dollar to remain stronger than the U.S. dollar "well into 2013."

But the bullish mood is not an unmixed blessing. As Sutton puts it in a note to clients, "we would caution that with positioning so extreme the real risk is a violent unwind, which would pressure USDCAD rapidly higher or exaggerate an up move. Positioning like this highlights that sentiment is bullish CAD; but should be watched closely for warning signals that sentiment is shifting."

In other words, with so many investors bullish on the Canadian dollar, there aren't as many left to move in if more good news surfaces. And if things start looking less rosy, the reversal could be swift.